CRA Compelling Disclosure vs Anonymous Taxpayers Affirmed by Court

Introduction – CRA’s Investigation Power under S. 231.2

Under section 231.2 of the Income Tax Act, the CRA has broad powers to compel third parties to disclose information related to Canadian taxpayers when carrying out enforcement of the Income Tax Act. Section 231.2 gives CRA the power to compel third parties to disclose taxpayer information even when the identity of the taxpayer in question is not known to the CRA. CRA’s power to compel third-party disclosure against unnamed persons has been subject to considerable litigation, especially when the CRA is suspected to have made these disclosure requests as a part of a “fishing expedition” where they simply compel third party institutions such as banks, charities, and utility companies to disclose confidential tax information from a large number of taxpayers without any valid reason to suspect their income tax non-compliance.

In a recent Federal Court case, Zeifmans v the Minister of National Revenue, raised the question of when the CRA must seek judicial authorization when compelling tax information disclosure from third parties. The Court ruled in CRA’s favor and affirmed CRA’s broad scope to compel tax information from unnamed taxpayers without a court order as long as CRA can make the case that the unnamed taxpayer in question are not themselves subject to CRA investigation.

Zeifmans – the Facts

The CRA issued a Requirement to Provide Information (RFI) to Zeifmans LLP, an accounting firm, against three of Zeifmans’ clients, Mr. Vaturi, Ms. Vaturi, and Mr. Ghermezian. Within the Requirement to Provide Information order, the CRA asked Ziefmans to disclose any entities that were owned, operated, controlled, or otherwise connected to these three individuals. These three individuals have been subject to CRA audits for their alleged non-compliance under the Income Tax Act dating back to 2012. Ziefmans LLP refused to provide such information and took the CRA to the Federal Court on the ground that CRA must obtain judicial authorization in order to compel this information.

The Law on CRA’s Power to Compel Third-Party Disclosure

The basis for CRA’s RFI was section 231.2 of the Income Tax Act. Section 231.2 has three subsections. Subsection one authorizes the CRA to compel a third-party to disclose tax information for any purpose related to the administration or enforcement of the Income Tax Act. Subsection two and three of section 231.2 places constrains on the CRA when the CRA is seeking information relating to unnamed persons from a third-party. The CRA must obtain a judicial authorization to compel information against unnamed persons from a third-party by meeting the criteria set out in subsection 231.2(3).

Zeifmans – The Dispute

While the Canadian tax litigation lawyer for Zeifmans raised four different grounds of dispute, however, the important issue for our understanding of CRA’s power to compel disclosure was the dispute over the relationship between subsection 231.2(2) and subsection 231.2(3). Namely, whether the CRA must seek judicial authorization under subsections 231.2(2) and (3) anytime it seeks to compel information relating to an unnamed person, or whether CRA only needs to seek judicial authorization when the unnamed person is under investigation for possible non-compliance under the Income Tax Act. Zeifmans took the former position, arguing the CRA must seek judicial authority in this case even when the targets of the tax audit are three named persons. Whereas the CRA took the position that since it is auditing three named persons in Mr. Vaturi, Ms. Vaturi, and Mr. Ghermezian, its disclosure request is not subject to the requirement of subsections 231.2(2) and (3). It is important to keep in mind in this context, investigation has a broader scope than tax audit. A person can be considered under investigation by the CRA without the CRA initiating a formal tax audit process.

Zeifmans relied on the case law Canada (Minister of National Revenue) v Toronto Dominion Bank for the position that the CRA must seek judicial authorization for all disclosure requests against unnamed persons. The Court ruled in favor of the CRA, stating that  Toronto Dominion Bank has been overruled by later case law such as Canada (Customs and Revenue Agency) v Artistic Ideas Inc. When the CRA is investigating a named taxpayer, to the extent that tax information from unnamed taxpayers is only incidental to the CRA’s initial investigation, the CRA may compel a third-party to disclose tax information from unnamed persons without a judicial order. As a whole, the intention of section 231.2 was to protect unnamed persons who are under investigation by the CRA, not all unnamed persons. In this case, since the CRA is already auditing three named persons, it does not need a judicial authorization to compel information from Zeifmans regarding related but unnamed persons.

Conclusions

One of the most concerning takeaways from Zeifmans is that the Federal Court seems fairly unconcerned with the possibility of bad faith on CRA’s part. The plaintiff in Zeifmans raised the possibility that CRA may claim it is only interested in information from unnamed taxpayers as a part of an investigation against named taxpayers, but CRA may audit the unnamed taxpayers later on. The Ziefmans ruling would effectively allow the CRA to carry out an investigation and tax audit against unnamed parties based on information obtained earlier without judicial authorization. It’s important to keep in mind CRA’s power to compel third-party to disclose information does not extend to law firms due to the solicitor-client privilege between lawyers and their clients.

Besides the risk of potential future investigation and tax audits, a taxpayer who is the subject of compelled disclosure under the Zeifmans reading of subsection 231.2 could lose his or her eligibility to take advantage of the voluntary disclosure program.

The general eligibility criteria for CRA’s voluntary disclosure program (VDP) is the following:  

• Voluntary: the CRA must have no prior knowledge about the taxpayer’s tax owing. 
• Complete: the taxpayer must disclose tax information on all tax years in which his or her filings were inaccurate. 
• Tax Owing: the taxpayer must owe tax to the CRA due to inaccurate filings.  
• One Year Past Due: the taxpayer can only disclose information for tax years that is at least one year past the filing due date. 

When a taxpayer is potentially non-compliant under the Income Tax Act, even if the taxpayer is not currently under investigation or audit by the CRA, he or she may fail to satisfy the “Voluntary” criteria of the VDP.

Pro tax Tip-Tax Guidance – Due Diligence and Voluntary Disclosure

Our expert Toronto tax lawyers can provide tax guidance on the complex issues regarding CRA’s disclosure requests and advice on whether a voluntary disclosure application can be beneficial for you. We also have extensive experience with representing taxpayers during CRA tax audits, objections, and tax court appeals.  We are going to defend your rights in all dealings with the CRA. All consultations with our students and experienced Canadian tax lawyers will be privileged and confidential whether you choose to retain us or not. Unlike accounting firms, attorney-client privilege between Canadian tax lawyers and their clients are the most strictly protected privacy privilege under the law and the law used to compel information against Zeifmans LLP cannot be used to compel information against Canadian tax lawyers. Our tax law firm can also extend solicitor client privilege to any accountant that we retain on behalf of our clients.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch